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As BoJ shifts role, raging dollar hits a bump By Reuters

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© Reuters. FILE PHOTO: A man wearing a protective mask walks past the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020. (Reuters)/Kim Kyung-hoon

By Amanda Cooper

LONDON (Reuters) – The dollar’s biggest rally in 40 years may finally have come to a screeching halt, now that the world’s last central bank – the Bank of Japan – has finally loosened its iron grip on long-term interest rates.

The Bank of Japan shocked markets on Tuesday with a surprise adjustment to control bond yields, allowing long-term interest rates to rise further in a move aimed at mitigating some of the costs of prolonged monetary stimulus.

Bank of Japan Governor Haruhiko Kuroda, who resigned in April, said this was a technical measure intended to improve the way the bond market works and was in no way a form of monetary tightening.

Whatever the case, the timing caught investors by surprise, sending the yen to a six-week high and Japanese government bond yields to seven-year highs – effectively doubling long-term borrowing costs.

The dollar is up 9% this year, as the Federal Reserve raised interest rates to combat inflation at their highest levels in 40 years. It recorded the most gains against the yen, which was affected by the Bank of Japan’s long-term yield control policy.

As other central banks, from the Bank of England, to the European Central Bank, and the Reserve Bank of Australia, raised their own rates, the dollar bulls ran out. Against a basket of major currencies, the US currency is heading for its biggest quarterly loss since late 2010. But the dollar can, so far, count on its advantage against the yen, to prolong its bullish run.

Societe Generale (OTC:) President Kit Juckes says the second-largest increase in the dollar since February 1985 is effectively over.

“Whatever we wear the world through, the Federal Reserve is creeping toward the end of a rate hike cycle,” he said. “The price hikes will get smaller and smaller and eventually there will be nothing and that will be the end of the story.”

Between late 1980 and early 1985, the value essentially doubled. This time, it has gained nearly 30% in less than three years.

The close relationship between Japanese monetary policy and US Treasury bonds adds another twist to the story.

After the Bank of Japan’s decision, the 10-year US Treasury note rose as much as 13 basis points, to over 3.71%. It was last up 9 basis points on the day at 3.673%.

With Japan being the largest holder of US Treasury bonds in the world, US government debt fortunes are more intertwined with the yen than anyone could wish for in the Federal Reserve.

said Adam Cole, currency analyst at RBC Capital Markets, referring to domestic investors who hold the bulk of Japanese government debt.

He said it all boils down to whether or not Japanese investors hedge their exposure to the Treasury.

Hedging bets

Yields on the protected 10-year Treasury note are now yielding less than -1%, according to Cole data, after falling below the 10-year Treasury yield earlier this year.

“Many Japanese yen-based investors, who have enjoyed years of positive hedges in Treasuries, now face a stark choice over what has become an extremely negative-yielding asset class,” Cole said.

As short-term US Treasury yields have risen – reflecting the belief among investors that the Federal Reserve will continue to raise interest rates for the coming months – they have outpaced longer-term yields, making hedges much more expensive.

This pushes foreign exchange rates below current or spot rates, meaning that investors who locked in their exposure to the greenback — which they need to buy Treasuries — face the possibility of a loss when they eventually exchange those dollars for yen.

Any advantage an investor gains by holding higher-yielding treasury bonds over Japanese government bonds is eliminated at the cost of the hedge.

“For a Japanese investor, the question is – if I have to hedge, is there any point in holding (US bonds) should I just sell my Treasuries?” said Juckes of Societe Generale.

On the sidelines, it appears that selling Treasuries to take advantage of better domestic yields would be a good option. But analysts said the pressure was “on the sidelines”, not least because of the sheer size of Japanese investors’ holdings of US debt.

“In terms of Japanese investors bringing money home – even if you look at a dollar/yen basis for example, you can still get a massive bounce in US Treasuries if you’re a Japanese investor, before switching back to the yen,” the strategist said. Richard Maguire.

“So I don’t think the math adds up,” he said. “I don’t think this sees wholesale Japanese reinvestment into Japanese government bonds, which would be negative for (German) bunds, (Italian) bunds, and US Treasuries.” .

JPMorgan (NYSE) strategists say high-quality corporate bonds will also feel the pinch, as they fuel global volatility, but there is an upside.

“The question now will be whether the market thinks this is just a technical adjustment or not

Eric Beinstein and Nathaniel Rosenbaum said it was the beginning of a more militant axis.

(This story has been reworded to fix a typo in the title)

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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